Turkish markets are getting slammed after the US and Turkey suspend visa services

Turkey and the US suspended visa services between the two countries.The visa suspensions exacerbate the already worsening relations between the two NATO members, and could hurt Turkey’s economy.Turkish markets got slammed after news of the suspensions crossed the wires.

Turkish markets are getting slammed after the US and Turkey suspended visa services between the two countries, exacerbating already deteriorating relations.

The Turkish lira fell by as much as 6.6% against the US dollar to a fresh record low, but has since reversed some of those losses. It was down by about 2.9% at 3.7196 per dollar at 8:35 a.m. ET.

The country’s benchmark Borsa Istanbul 100 Index fell by about 3.3%, and Turkish Airlines dropped by about 8%.

The US embassy in Ankara, the capital of Turkey, said on October 8 that it had suspended all non-immigrant visa services. This means that Turkish citizens can no longer get visas for business, tourism, or education, but people permanently moving to the US can still apply.

Within hours, the Turkish embassy in the US said it would be suspending “all visa services.” Reuters reported that later on Monday the Turkish foreign ministry “summoned a US diplomat to urge the United States to lift the visa suspension, saying it was causing ‘unnecessary tensions.'”

The US embassy’s decision to suspend visas followed Turkey’s recent arrest of a US embassy employee over suspected links to US-based cleric Fethullah Gulen, who was blamed by the Turkish government for the failed military coup in July 2016. In its statement, the US embassy said “recent events have forced the United States Government to reassess the commitment of the Government of Turkey to the security of US Mission facilities and personnel.”

“This latest incident marks a further deterioration in relations between Washington and Ankara, which are arguably now at their nadir,” analysts at BMI Research said in a note to clients.

“Turkish-US relations are likely to remain icy over the coming quarters,” they continued. “In a wider context, this latest incident suggest that Turkey will continue its general drift away from traditional Western partners, with diplomatic spats also erupting with several European countries, including Germany, in recent months.”

“Turkey, which has been in the western camp since the 1940s, is lumped together with these countries?” Murat Yurtbilir, who specializes in Turkish affairs at the Australian National University, told Bloomberg. “This is the lowest level in Turkish-U.S. relations.”

Should the visa ban stay in place, Turkey’s tourism sector likely won’t get slammed, since US tourists made up less than 2% of foreign visitors in 2016. The banking and financial sectors, however, could take a hit. As the analysts at BMI Research explained:

“[A] worsening of relations between the US and Turkey may weigh on the willingness of US and other Western banks to continue financing Turkish counterparts, especially in the context of a less supportive global backdrop as developed state interest rates rise. Cross-border bank lending is crucial not only for the Turkish banking sector, which is dependent on external financing, but more broadly for the financing of Turkey’s sizeable current account deficit and thus macroeconomic stability.”

A weaker lira could also weigh on the Turkish economy, according to the analysts.

“The scale of the [lira’s] depreciation is similar to the July 2016 sell-off after the attempted military coup,” Murat Toprak and Dominic Bunning of HSBC said in a note to clients Monday.

“[W]e believe the political risk is very different in nature compared to that episode and think this depreciation looks excessive. But we believe the risk of a downward spiral in [lira] cannot be ruled out – this will depend on diplomatic developments.”

In May, members of Turkish President Recep Tayyip Erdogan’s security detail attacked protestors in Washington, about a mile from the White House.

Tensions have also recently flared up between Turkey and another NATO member, Germany. According to the BBC, “several” German nationals remain in custody in Turkey, and Germany has warned its people against traveling there. Meanwhile, Turkey has asked Germany to deport Turkish citizens who have claimed asylum there.

US President Donald Trump, meanwhile, praised the leadership of Erdogan at the United Nations in New York last month. He added that the Turkish president “has become a friend of mine.“